Can ASOS shares make a recovery?

Asos, the online fashion business, has experienced a significant decline in its share price, falling 66% since February. The company has faced challenges due to declining sales and a financial slump caused by the end of the pandemic-induced online shopping boom. However, a potential turnaround may be on the horizon as Mike Ashley’s Frasers Group raises its stake in Asos to nearly 9%.

Mike Ashley, renowned for acquiring struggling brands, has been increasing his influence at Asos. With his Frasers Group approaching a 10% stake, Ashley has the ability to block any takeover bid that may emerge. This move sets the stage for a potential battle for control of the company.

Asos is not without its well-financed competition. Fashion entrepreneur Anders Povlsen, the owner of Denmark’s Bestseller chain and a major shareholder in German online fashion seller Zalando, has also expressed interest in Asos.

The struggling performance of Asos has made it a prime target. The company recently revealed a loss of £291 million in the six months leading up to February, attributed to an 8% decrease in sales, including a 10% drop in the UK market. The challenging trading backdrop has further exacerbated the company’s difficulties.

To alleviate its financial strain, Asos initiated a £75 million equity raise last month, led by Povlsen and Camelot Capital Partners. The funds raised were part of a refinancing package to replace a £350 million loan. Frasers, Asos’s third-largest shareholder, participated in the fundraising but expressed disappointment that a closer partnership offer was declined.

If Frasers Group were to take over Asos, the company could benefit from Ashley’s retail expertise and establish a stronger trading relationship. Frasers already owns a portfolio of brands, including Jack Wills and Agent Provocateur, which it could potentially integrate into Asos’s platform.

Asos has chosen to raise funds independently, offering the same deal to all its institutional shareholders. Bantry Bay, backed by hedge fund Elliott Advisors, provided a £270 million three-year loan facility alongside the equity raise. This injection of capital and support from major investors indicates confidence in Asos’s long-term prospects.

The potential takeover battle has added another layer of complexity to Asos’s future. Turkish fashion business Trendyol, controlled by Chinese internet giant Alibaba, reportedly proposed a £1 billion bid for Asos in December. However, no talks are currently underway with Trendyol.

While Frasers Group declined to comment on its stake increase in Asos, the move aligns with Ashley’s history of building stakes in brands to gain influence or establish trading relationships. The battle for control of Asos could shape the future of the struggling online fashion business.

According to Refinitiv data, analysts’ consensus rating for Asos is currently “hold,” with a median long-term price target of 600 pence, indicating a potential 38% increase from the current price.

Asos’s fate hangs in the balance as the battle for control between Frasers Group, Anders Povlsen, and other potential suitors unfolds. The outcome will determine the company’s ability to recover from its financial challenges and reclaim its position in the online fashion industry.